Bank of England lending gold to GLD again?

A run on gold caused tightness in the physical gold market in the first quarter of this year. Due to the coronavirus, many planes are on the ground, which makes it more difficult to get physical precious metal to the right place in time. In recent months, these logistical problems have led to longer delivery times and disrupted the pricing of gold in New York. The shortage in the market was so great that the Bank of England had to step in again for the first time in four years. In the first quarter, the central bank once again made gold available to the world’s largest gold ETF.

According to the latest report to the US regulator SEC, the Bank of England has once again provided gold to GLD since 15 April. On 27 April it peaked at 45.91 tonnes, about the same amount as the total inflow of the fund in the second half of April. From this we can conclude that almost all of the precious metal inflow into the fund during that period was supplied by the central bank. The relevant extract from the report is given below:

7. Subsequent Events

Since April 15, 2020, gold was held by a subcustodian (the Bank of England), and the greatest amount of gold held on April 27, 2020 was approximately 45.91 tonnes or 4.4% of the Trust’s gold.

Bullion banks

Normally bullion banks provide the gold to the fund. They make gold available and get new shares of GLD in return. The fact that the fund also obtained a substantial amount of gold through the Bank of England in April suggests that it could not obtain sufficient metal through traditional channels. This happened earlier in 2016, when the Bank of England first lent gold to the fund. At the time, the volume was 29 tonnes.

It is remarkable that the Bank of England once again acts as sub-custodian. It is possible that one of the bullion banks holds gold directly with the Bank of England, as a result of which the gold seems to originate from the Bank of England. Another explanation is that the central bank has borrowed gold to make it available to GLD. Unfortunately, based on all publicly available information, we cannot confirm this. However, this development underscores the tightness in the gold market in recent months.

Investing in gold ETFs

Although a gold fund such as GLD manages a physical gold stock, as an investor you do not have an option for physical delivery of gold. There is also no 100% coverage, because an exchange traded fund (ETF) always sells a bit of precious metal to cover management and storage costs. If you as investor are only looking for exposure to the price of gold, ETFs are easy to trade instruments. If you want more security, physical possession of gold is preferable.

This article originally appeared in Dutch on Geotrendlines.nl

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